We examine whether the choice of cash flow disclosure under International Accounting Standard 7 has an influence on the cost of capital incurred by Australian listed companies. Results indicate that indirect method companies incur a significantly higher ex‐ante cost of equity than direct method companies using a combined equity model approach. We also demonstrate that using an optimal weighted combination of equity models reduces model variance and bias compared to using a single equity model. Our findings support mandating the direct method and have the potential to induce companies to report the direct method to increase company value.
|Number of pages||32|
|Journal||Accounting & Finance|
|Early online date||26 Nov 2018|
|Publication status||Published - 1 Apr 2020|
- cash flow disclosure
- direct method
- indirect method